I have a tenant coming up on the end of their first year, and am having a little difficulty on setting their renewal increase. We leased to them after doing a complete remodel and market was $995 last year. In that time rent had go up 40%, we just leased a comp for $1399.
My management wants to go up to $1200, but I’m used to increases being more along the lines of 5-10%. They are good tenants, and the are is not great but the unit is new and clean.
This is in Phoenix
@Ryan Heywood - This is definitely a difficult decision to make. If rents have truly gone up that much for your market, I'd be hesitant to only do a 5 to 10% increase. If rents shoot up again, you'll find yourself even more under market value. I'd probably go with what your property manager suggested. If not you could find yourself having to do an even more dramatic increase the following year if they decide to stay. This will likely piss them off even more.
Rental markets are crazy all across metros in the country. The number 1 rule of business is to stay in business. If your gut is telling you to raise rent by 5-10% and your business can also incur the cost of not going to 1.2k, then I would listen to your gut. A good tenant that pays on time at regular intervals is gold.
If I were in your shoes, I would increase rent to 1,200. Let the tenant know ASAP so that I can get this leased out again if the tenant decides to move out. Is your PM company also responsible for leasing up the unit too? This might impact your decision as well.
Thanks for the input @Long Dang @Sean McKee . I just haven’t had market rents go up this quickly. The building was at $575 when I got it in 2019 before rehab. My management company does do the lease ups so I’ll probably default to their recommendation. It’s just crazy to see how fast the prices have gone up.
@Ryan Heywood Tough call but I'd meet in the middle ($1200-1300 per month) but lean more towards gut feeling. If you lose a great tenant over this I'd be pissed. If that doesn't concern you just go with the PM recommendations. Either way you're in a great place. The demand for housing in AZ is insane right now.
I agree with everything Long Dang mentioned, well said.
@Ryan Heywood just be careful because most management companies charge a months rent fee for leasing and 8% per month. They may view the rent increase as win-win for them. If the tenant stays, they get $16 more per month. If the tenant leaves, they get $1399 leasing fee and $32 more per month. If you have a month of vacancy, you lose $1399 per month plus the $1399 releasing fee. Yes, you will increase rents by $404 per month, but with even one month of vacancy that is 7 months to break even!
Ultimately you make the decision, because you own the property. I don't know your market or tenant, so it is hard for me to tell you what to do.
My first question would be "What makes them good tenants?" Then I would go from there. Over time I've come up with an internal barometer scale for tenants:
Great tenants: pay rent early every time, virtually no service calls and great flexibility when there is a service call, keep the house neat and clean all the time, have great communication, keep me in the loop on anything that matters/might matter to me (neighborhood, things that appear to be deteriorating on the house, etc), stay more than 1 year, leave the place so nice turnover effort & cost is virtually nothing.
Good tenants: pay rent on time, keep the house reasonably presentable, minimal service calls, stay for at least a year, turnover cost and time is not excessive - usually just cleaning, replacing a couple of blinds, etc.
Satisfactory tenants: pay rent on time but sometimes needs prompting, house is sloppy and full of too much furniture but not damaging anything, occasional BS service calls, occasional stupid complaints, not ideal turnover but not ridiculous damages. (Sad that this is today's baseline).
Unsatisfactory tenants: pay rent but needs prompting and is sometimes late, doesn't keep the house neat, fairly regular BS service calls, complainers, causes occasional trouble with neighbors, generally reflects poorly on our business.
GTFOO my house tenants: non-pays or only partial pays, nothing but excuses, abuses the property, causes trouble with neighbors, live like filthy slobs.
How long did it take to rent the comp for $1400?
Assuming you're correct on the numbers, I'd likely not be worried about losing this tenant. Market rent is $400/month higher. That's $4800 per year. You can have the unit vacant for 3 months and still be ahead if you can get $1400/month.
If you want, let the tenant know that market is now $1400 and you're offering renewal at 10% below market at $1260 as a good faith renewal.
@Ryan Heywood I have lived in the Phoenix area and have had sfh rentals here for years. Its true that rents have gone up very quickly here, however, some areas are getting more saturated with rentals and are taking longer to rent out. (85037) for example, and others areas might have fewer rentals/ higher demand. This could be a factor if you want to keep this tenant and prefer not to have turnover.
I keep an eye on Zillow when my houses are up for renewal and watch to see how fast they are renting and for how much money and how similar they are to my property. And I do factor in how good my tenant is. Your property manager should also have that information to share with you why they are recommending that increase for your property.
I really like your " Tenant Barometer Scale" works for me !!
@Ryan Heywood why hire property management if you are not going to listen to their advice on pricing your property? I would listen to them. My $.02
@Ryan Heywood I would do the increase pointing out that it is less than market and probably giving 60 days notice of the increase. Tenants do watch zillow etc to see what units are leasing for so they may be aware there are increases in rental prices and just wondering what they will be hit with.